Conduit, Israel’s First Billion Dollar Internet Company

So now it’s official... Israel has its first billion dollar Internet startup. And remarkably, it’s still controlled by founders and employees.

The Israeli press today reports that JP Morgan acquired a $100 million stake in Conduit at a $1.3 billion valuation. JPM bought remaining shares held by early Conduit investor Yozma, completing Yozma’s exit from Conduit following its recent sale of $39 million of stock at an identical valuation to private equity group W. Capital Partners.

Last week I sat down with Conduit CEO Ronen Shilo (pictured above) at the company’s Rehovot office to discuss the company’s impressive growth since 2005 launch, and where Shilo hopes to take things from here.

Conduit’s cash cow is its toolbar, which the company says has been used by more than 200,000 sites, including MLB.com and Miniclip, to reach 250 million users. When those users run a search via the publisher’s toolbar, Conduit receives a volume and ad performance payout from either Microsoft’s Bing (in the US) or Google (outside the US).

Israel’s The Marker reports Conduit generated $200 million in profit last year on $500 million revenue, but I think those numbers are somewhat exaggerated. In any case, Conduit right now is indisputably a cash machine. But Shilo knows it can’t stay that way in its current form.

“The future is not in toolbars,” he announced straight up to me. “We are broader than that. We’re an engagement company. We aim to help publishers and online brands engage with their users on any platform.”

To that end, Conduit has been taking a number of steps to try to expand its product beyond its much-maligned toolbar.

Last year Conduit acquired another Israeli startup, Wibiya, for $45 million. Wibiya’s footer bar sits on a publisher’s site, complementing Conduit’s toolbar which is used primarily off the publisher’s site. The 30-member Wibya team, like every Conduit unit, works in its own discrete area of the Conduit building, with its own management team and minimal joint activity with the rest of the company.

In an effort to enter the mobile market, Conduit also launched a smartphone app-building platform last year. But Shilo acknowledges that the mobile platform hasn’t really achieved his goals for it to date: “It did not work out as well as the toolbar.”

Nonetheless, Conduit has found significant niche community pickup for the mobile app platform among independent musicians and around event content, and it’s following up on those markets aggressively. In addition, Conduit’s mobile unit just launched a slick Android lockscreen app that aims to capture that critical area, including its search box, for brands.

I was also given a sneak preview of an extremely ambitious new consumer-facing product that Conduit plans to unveil later this year. I’ll provide details as its launch approaches.

All these products suggest that Conduit -- despite the current internet IPO and buyout wave -- is playing the long game, looking to leverage its massive reach and cash position to build a sustainably profitable business that remains under founder and employee control for years to come. That’s what Shilo told me, and what he recently extolled in a blog post, entitled "In Praise of Control" on Mark Zuckerberg’s handling of Facebook’s IPO:

What interests me most is the fact that Mark Zuckerberg is about to be worth $28 billion – and still maintain operational control of the company... As someone who has been concerned about maintaining control of my company from the beginning, I completely understand and empathize with what Zuckerberg and his financial gurus have structured. My partners and I control over 50% of Conduit; I wouldn’t have it any other way, and I don’t think we could have achieved what we did otherwise.

In an effort to keep it that way, Conduit took the unusual step last year of dipping into its cash hoard to pay out an approximate $50 million dividend to shareholders and employees who exercised options, and it plans a similar dividend this year. With fully 22% of shares still held by employees, this is a company that wants to retain its talent and continue to compete for the limited pool of top notch Israeli engineers. Some Conduit employees also participated in the recent stock sale to W. Capital Partners at the $1.3 billion valuation.

For the holistic and sexy Israeli Internet scene, Conduit’s newly pegged 10-figure valuation will no doubt inspire. But for an ecosystem characterized by premature sales of promising young companies, the fact that Conduit hit the magic $1 billion mark not through acquisition, but rather while still scaling, is no less significant.